Papers Relating to Bitcoin and Related Topics in Law: Part VIII

by James · May 5, 2023

This article was first published on Dr. Craig Wright’s blogand we republished with permission from the author. Read Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7.

Lessig (2000) advanced an early concept adopted by cypherpunk computer coders and anarchists: “Code is law.” Such a mentality has been propagated with respect to electronic cash and blockchain systems despite being discredited by Timothy Wu (2003), who demonstrated the flaws of such an approach. Most critically, human actors write and maintain all code and algorithms. Nevertheless, the question of decentralized systems has been raised by Silicon Valley companies and those who seek to ignore the responsibility that comes with the creation of an engineering product.

Recently, authors have revived such a discredited view of algorithms, and integrated it into the narrative surrounding blockchain technology, moving from ‘code is law’ to a concept of ‘law is code’ (De Filippi & Hassan, 2018). Zwitter and Hazenberg (2020) extend the argument by promoting unregistered companies as a new structure, ignoring earlier online attempts to create digital companies that act outside existing corporate rules. The development of online stock market listings in the 1990s demonstrates an earlier synergistic attempt to create a system outside the rules of governance. The lack of understanding in relation to partnership law leads to the flawed concept of a DAO as a system without formal governance. By assuming that automated structures remove the holder of the key or token from responsibility for the actions of the algorithm, the authors have failed to understand how corporate law and contracts work.

Similarly, Wylie (2018) claims that blockchain-based systems fall under the absence of law. Nevertheless, the author fails to point out UNCITRAL provisions for electronic contract, published in 1996 (Habibzadeh, 2014). The promotion of ‘code as law’ based systems represents a reaction to legal systems by technically aware individuals who embrace a distaste for the existing political system and seek socialist or anarchist alternatives. The problem with such an approach is that the existing legal system and framework already includes the problems that are said to have no solution. Consequently, the argument for decentralization falls flat.

Annotated bibliography

De Filippi, P., & Hassan, S. (2018). Blockchain technology as regulatory technology: From code is law to law is code (arXiv:1801.02507). arXiv. https://doi.org/10.48550/arXiv.1801.02507

The authors argue that the integration of blockchain systems with algorithmic control through what is called a “smart contract” enables the changing nature of code that has the effect of law associated with the new concept of law that develops as code. While such an argument extends the cryptoanarchist concept of ‘code as law’ presented by Lessig (2000), the subjects of law and contractual control remain misunderstood. The argument presented by the authors creates a false dichotomy of issues by misrepresenting contract law and the nature of the contract. Most critically, systems including electronic data interchange (EDI) have already existed and allowed direct machine-to-machine exchange of information for decades (Dearing, 1990).

Most critically, the formation of a contract requires a meeting between human parties. Machines fail to integrate rational agency, and the machine’s actions are merely the consequence of human actors setting a predetermined algorithm, along the path of actions performed by human programmers. The argument that automation is inserted into a decision-making process fails to integrate the actions of the programmer in defining the algorithm. Code development integrates the decision-making process, and arguing that the machine is programmed does not reduce responsibility or accountability for programmed actions.

Finally, the idea of integrating legal rules into the code demonstrates the complete lack of awareness expressed by the authors regarding the nature and function of the courts. Automating decisions is beyond human agency, and courts have a rational process for choosing outcomes based on fairness and justice. None of the aspects of human interaction can be programmed. Although it is possible to automate many processes, it does not reduce the demands on developers to act responsibly or take responsibility for the code they produce.

Wylie, B. (2018). Steering vacuum cleaner and how code becomes law. Waterloo, ON: Center for International Governance Innovation. https://www.cigionline.org/sites/
default/files/documents/Data%20Series%20Special%20Report.pdf#page=94

The argument presented in this special report again overlooks existing data contract rules formulated under the UNCITRAL provisions and global implementation of the UN Electronic Contracting Guidelines (Habibzadeh, 2014). Similarly, the paper wrongly assumes that the common law is not resilient or flexible enough to integrate new technologies. Even such an approach would be a stretch, as the concept of “smart contracts” only integrates a new form of EDI and digital value exchange.

The authors assume that existing laws and legislation regarding information technology-based systems do not apply. Nevertheless, such an approach is wrong. Information technology law has been used in a variety of cases worldwide for over four decades (Lloyd, 2020). So although many believe it is new or not covered within existing legal frameworks, a number of existing legal systems have already been developed with extensive case law in various areas. In addition, peer-to-peer file sharing cases throughout the 1990s and 2000s showed how the legal system could behave even when distributed systems are involved.

Zwitter, A., & Hazenberg, J. (2020). Decentralized Network Governance: Blockchain Technology and the Future of Regulation. Limits in Blockchain, 312. https://doi.org/10.3389/fbloc.2020.00012

Zwitter and Hazenberg (2020) argue that the creation of blockchain-based technologies that allow the automation of certain validation and consensus tasks provides an opportunity to integrate a number of new governance norms that will enable Lessig’s “code is law” system and structure ( Lessig, 2000). Yet the argument fails for the same reason that Lessig’s original argument failed when Wu (2003) demonstrated the flawed aspects of arguing that algorithms acted independently of human action or that a multitude of distributed actors would lead to a scenario where code could form an independent system outside the law.

The article presents a series of existing legal structures that are presented as new or new. By arguing that governance models can be structured based on voting rights in tokens, the authors present only an unregistered company that will not have the normal corporate protections associated with shareholders. The authors present a form of partnership without understanding the responsibilities and duties that come with such a structure. As such, the paper merely presents existing legal systems, concluding that they have created something new when in fact they have removed the hard-won protections for shareholders that come with corporate rights.

The promotion of decentralization in the article takes on the look and feel of a theological argument that ignores real conditions and structures that contradict the author’s belief structure. In many ways, the paper presents a delusional concept of decentralization based on a straw man: that legal structures do not already cover partnership agreements, or that a group of individuals acting outside a formalized corporate structure will not be seen as a partnership under law.

Additional references

De Filippi, P., & Hassan, S. (2018). Blockchain technology as regulatory technology: From code is law to law is code (arXiv:1801.02507). arXiv. https://doi.org/10.48550/arXiv.1801.02507
Dearing, B. (1990). The strategic benefits of EDI. Journal of Business Strategy, 11(1), 4.Habibzadeh, T. (2014). Develop and modernize Iranian law in the context of electronic contracts by a comparative study of UNCITRAL rules, English law, US law, EU law and Iranian law. University of Manchester (UK).
Lessig, L. (2000). Code is law. Harvard Magazine, 12000.
Lloyd, I. (2020). Information Technology Act. Oxford University Press.
Wu, T. (2003). When code is not allowed. Virginia Law Review, 89(4), 679–752.
Wylie, B. (2018). Steering vacuum cleaner and how code becomes law. Waterloo, ON: Center for International Governance Innovation86–90.
Zwitter, A., & Hazenberg, J. (2020). Decentralized Network Governance: Blockchain Technology and the Future of Regulation. Limits in Blockchain, 312. https://doi.org/10.3389/fbloc.2020.00012

This article has been lightly edited for clarity.

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